Consider the following production function of DVDS: Q = K0.5L 0.5, where Q represents DVDS (boxes per hour), K denotes capital input (units per hour), and L denotes labour input (units of worker time per hour). The unit cost of capital and labour are $40 and $20, respectively. a) What is the optimal input ratio of labour and capital for the production? b) Determine the appropriate input mix to produce 800 boxes of DVDS. Compute the cost of production. c) Suppose the government decided to offer a subsidy that would make the cost of labour $15. What is the optimal input mix to produce the same level of output, and the new cost of production? Also, compute the substitution effect in the employment of labour.

Consider the following production function of DVDS: Q = K0.5L 0.5, where Q represents DVDS (boxes per hour), K denotes capital input (units per hour), and L denotes labour input (units of worker time per hour). The unit cost of capital and labour are $40 and $20, respectively. a) What is the optimal input ratio of labour and capital for the production? b) Determine the appropriate input mix to produce 800 boxes of DVDS. Compute the cost of production. c) Suppose the government decided to offer a subsidy that would make the cost of labour $15. What is the optimal input mix to produce the same level of output, and the new cost of production? Also, compute the substitution effect in the employment of labour.

ENGR.ECONOMIC ANALYSIS

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ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Question

Consider the following production function of DVDS: Q = K0.5L 0.5, where Q represents DVDS
(boxes per hour), K denotes capital input (units per hour), and L denotes labour input (units of
worker time per hour). The unit cost of capital and labour are $40 and $20, respectively.
a) What is the optimal input ratio of labour and capital for the production?
b) Determine the appropriate input mix to produce 800 boxes of DVDS. Compute the cost of
production.
c) Suppose the government decided to offer a subsidy that would make the cost of labour $15.
What is the optimal input mix to produce the same level of output, and the new cost of
production? Also, compute the substitution effect in the employment of labour.

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